Free Trade: Good for Rich and Poor

February 5, 2017

The last 25 years have seen the most rapid improvement in the human condition in history. In 1990, 35% of the world’s population, a total of 1.85 billion people, lived in extreme poverty (defined as living on $1 per day or less). By 2013, only 10.7% of the world’s population, a total of 767 million people, were living in extreme poverty (defined in 2013 as living on $1.90 per day or less). The number of people in the world in extreme poverty had been cut by more than half, even as the world’s population had grown. In addition, hundreds of millions of people had moved into something approaching middle-class prosperity and security. It is a mystery why this incredible story is virtually unknown.

How did it happen? It is largely the result of some poorer nations adopting more free-market policies, including free trade policies. Economists disagree on many things, but free trade among nations is a rare exception. Most economists agree that a nation’s economy benefits when its people trade goods and services with people in other countries.

Unfortunately, and despite the economists, opposition to free trade is widespread. Donald Trump and Hillary Clinton disagreed on almost everything during their presidential campaigns, except that international trade was hurting the United States. Why are they, and so many others, missing the real story?

“Seen” vs “Unseen”

The problem is that it is easy to spot harm caused by free trade. People see some jobs lost and some businesses closed. Those are the “seen” effects of free trade. The“unseen” benefits of free trade, though, are easy to overlook.

Consider Ann, who is about to buy a new chair for her home. Compare what happens, with and without free trade:

Without Free Trade: Because of restrictions on imported furniture, Ann’s “Made in America” chair costs her $65. Ann walks out of the store with (1) a new chair.

With Free Trade: Because of free trade, Ann’s “Made in Chile” chair costs $50. Ann walks out of the store with (1) a new chair and (2) $15 left in her pocketbook.

Ann then uses that $15 to buy a fine lunch at a local restaurant. Thanks to free trade, Anne’s $65 buys her more: both a chair and a lunch. She probably doesn’t connect that meal to free trade, though. Ann doesn’t think, “I have a chair and a lunch, instead of only a chair, because of free trade.” That benefit of free trade is unseen.

That $15 is now paying the wages of the waiter, and keeping the restaurant going. But again, the waiter doesn’t think “I have a paycheck in part thanks to free trade with Chile.” And the restaurant owner doesn’t think “My restaurant is doing better because of free trade.” Those benefits of free trade are also unseen.

Unseen though they are, the benefits are very real. Free trade makes people richer. Ann can buy more with her $65, and that spending supports businesses and jobs. Beyond the “seen” effects of free trade are significantly more “unseen” benefits.

But what about the lost job at the furniture factory? Talk of abstract “unseen benefits” is little comfort to the furniture maker who is losing a paycheck.

The fact is, he may need to learn another way to make a living, just as people have always had to do in vibrant, growing economies. And perhaps government can provide relief and help with re-training and education. But the alternative of tariffs and barriers and restrictions on the free trade of goods is not the answer. Those anti-trade policies make us all poorer.